The US stock market hit its highs of the year Tuesday as investors absorbed positive economic news and the statement from the head of the Federal Reserve that, technically, the recession was "very likely over."
The S&P 500, the Dow, and the Nasdaq stock indexes moved up to levels not seen since last fall.
In many ways, the economic signs are pointing up, too. In the year since the Lehman Brothers collapse led to the worst financial panic since the Great Depression, the economy has weathered the storm and, apparently now, the recession. But two important parts of the economy are not roaring back: the consumer and the individual investor.
I've written before about whether consumers have permanently changed their spending habits. The same question holds for investors and their investing habits. They're supposed to be the leaders, the ones who turn bullish before anyone else. This time, though, they're more subdued.
For all the progress that the stock markets have made since the lows six months ago, the Dow Jones Industrial Average remains 11 percent below the close of Sept. 15, 2008. (Remember, that was the day the Dow fell 504 points because of the Lehman bankruptcy.) The index is 32 percent below the high set in 2007.
There are two explanations for this. One is the rational one: Investors looking at company prospects just don't see the growth necessary to bid up prices to year-ago levels. (Of course, those 2008 levels now look wildly irrational.) The other explanation is emotion-based: This generation of investors has permanently rejected the euphoria that reigned as recently as two years ago.
These explanations are not mutually exclusive. And it will be years before we'll know whether No. 2 is really true. But some observers sense a permanent change.
"I don't know [that] things will ever be the same again that we're going to turn back the clock and experience the same kinds of attitudes toward investing that we saw before," says Craig Hogan, director of customer intelligence for Scottrade, an online brokerage based in St. Louis. "We are irrevocably changed in the way we view the markets. And the way that investors saw their personal role in investing has changed, too."
Long term, people still believe in stocks, he adds, but they're more guarded about the near term. For example: 70 percent of investors now say they're becoming more active in managing or monitoring their finances, according to a Scottrade survey of more than 1,000 adults released last week. Just over half think they'll recoup their losses in the next three years.
Scottrade is also seeing a large influx of investors to its services, which suggests that more investors want to do the trading themselves. At the same time, mutual-fund giant Vanguard, a leader in the let-me-follow-the-market style of investing, has also seen a net inflow of nearly $70 billion to its funds so far this year, mostly bond funds. Two of every three dollars are going to index funds, says John Woerth, a Vanguard spokesman. "By and large, people stuck to their investment programs" during the financial crisis.
So one year after Lehman, investors are more cautious and alert. Many of us have come closer to seeing a global financial meltdown than we ever expected to -- or wanted to. Yet we've survived. If our financial goals seem more distant, we're still expecting stocks and bonds to take us there.
Those are healthy signs, despite all the turmoil.
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